What is Liquidity in Crypto and In What Ways Can It Be Delivered?
Any financial market – be it stock or bond – needs a mechanism that provides sufficient liquidity to facilitate asset trading, and the crypto market is no exception.
Cryptocurrency liquidity means the ease with which crypto assets can be bought, sold, swapped, or converted to fiat currencies. In this article, we will discuss the liquidity of cryptocurrency – who provides it and how.
Crypto Exchange Liquidity
Centralized trading exchanges such as WhiteBIT or Coinbase serve institutions that invest in crypto and trade it. Large-capital transactions require a sufficient level of liquidity, which is just impossible to provide by retail trading alone.
Centralized exchanges partner with a crypto market-making company that further acts as an agent always ready to buy or sell crypto assets in any amount and at any time. A crypto exchange liquidity provider is an institutional company engaged in financial activities or a high-frequency trader.
Here are some of the largest market makers:
● Jump Trading
The role of market makers is essential for centralized trading platforms. They ensure there is always demand and supply for assets, so other platform participants can easily buy and sell tokens.
A market maker’s earnings come from the bid-ask spread, in addition, they receive reduced fees for trading. Every centralized exchange has different market-making programs, including thresholds and commissions. Market-making companies often need to prove their capability and compliance to trade with large amounts.
Liquidity Crypto Provision on Decentralized Platforms
Investors that use decentralized platforms for trading (such as UniSwap), may also act as liquidity providers through participation in liquidity pools. Unlike working with centralized exchanges, DEX does not require any proof of capital or compliance. So anyone with any capital size can become a liquidity provider on DEX.
Now let’s find out what are liquidity providers in crypto DEX platforms. A liquidity pool (LP) is a smart contract where tokens are locked and then used to provide liquidity for trading. In addition, those tokens can be used for lending and borrowing. In return for locking their tokens in a pool, liquidity providers receive their benefits.
The level of liquidity of cryptocurrency reflects how easily the asset can be bought and sold. The higher it is, the better for the market. Market makers and liquidity providers stand as essential market participants, enabling a healthy environment for trading platforms.